Obama's Pivot to Europe

Forget China. An EU trade deal would be the real game-changer.

February 20, 2013

At a time when everyone in Washington wants to talk about making a “pivot” to Asia, both economically and politically, it would be tempting to dismiss President Obama's decision, announced in his State of the Union address, to pursue a United States-European Union free trade area. It would also be a big mistake. The fact is, the U.S. and the EU have it in their power to enact a potentially game-changing policy that could boost economic growth on both side of the Atlantic, help the transatlantic allies deal more effectively with a rising China, and fill the void left by the collapse of global trade talks.

The focus on China’s surge during the past decade has obscured the continuing strength of Europe and the United States, and their continuing importance for each other. In 2011, the transatlantic economy represented about half of world GDP and $5 trillion in total commercial sales. Taken together, the EU and US account for 25 percent of global exports and 32 percent of global imports. And despite their recent travails, transatlantic consumers retain enormous purchasing power. GDP per capita is about $50,000 in the US and $32,000 in the EU, compared to about $9,000 in China.

To be sure, as trade with Asia has surged, the share of global trade represented by flows across the Atlantic has declined. But the absolute amounts have not, and the numbers are huge. According to a study by Dan Hamilton and Joe Quinlan of Johns Hopkins’s Paul H. Nitze School of Advanced International Studies, the U.S. exports three times as many goods to the EU as to China, and the EU exports twice as much to the U.S. as to China. U.S.-EU merchandise trade totaled about $650 billion in 2012, up 68 percent from the beginning of the century. In addition, the US and EU are the world’s two leading services economies. In 2011, 38 percent of total U.S. service exports went to the EU, and 41 percent of its service imports came from Europe. Between 2001 and 2011, U.S. services exported to the EU more than doubled, from $102 billion to $225 billion, and despite the recent slowdown in Europe, US exports there continued to rise in 2012.

Despite the surge in exports to China, 45 out of 50 U.S. states still export more to Europe than to China, typically by wide margins—eleven times as much for Florida, nine times as much for New Jersey, four times as much for Texas (the leading state exporter to the EU), and three times as much for Illinois. Even the famously westward-looking state of California exported twice as much to Europe as to China.

Moreover, the United States and Europe overwhelmingly favor one another as locations for foreign direct investment. Since 2000, the share of total FDI going from the U.S. to Europe has remained steady at 56 percent. European investment represents a remarkable 71 percent of total FDI in the United States. The growth of the Chinese economy has not fundamentally changed this calculus. Since the turn of the century, the U.S. has invested 14 times as much in the Netherlands as in China, and 11 times as much in the UK.

Relatively small gains off this huge base could have a big impact. In recent years, trade talks have been divided between negotiations that are too big to succeed and agreements that are too small to matter. With the failure of the Doha round, the old post-war model—fully global trade treaties—has all but collapsed. Bilateral treaties with countries such as Panama, Columbia, and South Korea have proven to be achievable in recent years. But whatever economic boosts those deals provide are not large enough to produce noticeable gains in U.S. economic growth and jobs. The EU-US talks are obviously different.

Although tariffs between the EU and the U.S. are comparatively low, a study by the European Centre for International Political Economy estimated the gains from a transatlantic zero-tariff agreement at between 0.99 and 1.33 percent of GDP for the U.S., and somewhat less for the EU. Another estimate by ECORYS Nederlands BV, which modeled the impact of a broader FTA agreement convering non-tariff barriers as well as tariffs, placed the increase in overall US exports at 5.7 percent. Encouragingly, the impact on job creation and real wages is projected to be positive for both skilled and unskilled workers.

Of course, that leaves the question of whether an agreement is likely to emerge from the negotiations. From a U.S. domestic political standpoint, prospects for progress appear reasonably good. Because European labor, environmental, and regulatory standards are on a par (at least) with ours, the kinds of objections that have slowed the ratification of bilateral treaties with developing countries are much less relevant. At this point, the AFL-CIO seems willing to go along. And the fact that nearly all the states have substantial skin in the EU trade game suggests the potential for a broad coalition in Congress.

Still, significant obstacles remain. Agreeing on an approach to regulation won’t be easy: Brussels and Washington approach this sphere with very different aims and norms. Because Europe’s government contracting is more open to foreign firms than is ours, procurement reform is likely to encounter U.S. opposition, especially among defense contractors.

Agriculture will be especially challenging. Michael Froman, Obama’s advisor on international economic affairs, described it as the “elephant in the room that we can’t ignore.” Not only is Europe’s agriculture subsidy regime even more distortive than ours; the EU virtually bans genetically modified crops, which have become increasingly important in U.S. agriculture, and it doesn’t much like hormone-treated beef or chlorine-sterilized chicken either. In the hyper-polarized Washington atmosphere, there is agreement across party lines on one point: an EU-U.S. agreement that does not open up Europe to American farm products will be dead on arrival.

In that sense, the greatest impediment to a deal may prove to be France. While Germany’s Chancellor Angela Merkel is gung-ho for a treaty, the French finance minister has been much cooler, describing his country as “open but vigilant.” France has more to lose from agricultural changes than does any other country, and it will resist intense pressure to relax the regime of cultural protectionism that irritates American producers of films and TV shows. On the other hand, France’s exports have fallen by 8 percent since 2008, 5 percentage points worse than Germany’s performance during that period, the economy is stuck in neutral (GDP declined by 0.3 percent between the third and fourth quarters of 2012), and French unemployment has risen by nearly a percentage point, to 10.3 percent, since 2011. If Europe’s other major economic powers can agree to put growth first, Francois Hollande may decide that he cannot afford to stand in the way of an agreement.

But first, Obama will need to show that his commitment to a deal is more than just a matter of rhetoric. While Europe’s negotiating team is in place and ready to get started, the American side is much less settled. It’s hard to see how such detailed and wide-ranging talks could be run out of the White House; Obama will have to select a strong, credible figure as the next United States trade representative, do what it takes to get his nominee confirmed in a timely fashion, and then make sure the USTR has the staff and resources needed to conduct the negotiations.

A policy that commands support across international borders as well as domestic party divisions and promotes long-term growth without spending scarce public dollars sounds too good to be true. And maybe that’s what it will turn out to be. Still, thanks to changing circumstances and quietly effective preparatory work, the chances of agreement appear brighter than in decades. Obama’s endorsement of U.S.-EU negotiations reportedly was a last-minute addition to the State of the Union. It might just turn out to be the speech’s most significant sentence.

William Galston is the author of Anti-Pluralism: The Populist Threat to Liberal Democracy.